During the Expected “Year of Increases,” Commercial Office Building Owners Should Consider Disposition or Reposition Strategies
“Rising interest rates, tenant improvement costs, and vacancy rates in commodity office buildings suggest timing is ideal for ownership reevaluation,” says Owen Rouse of MacKenzie Commercial Real Estate Services
Continuing the trend started during the second half of 2022, economists and real estate experts alike have designated 2023 as “the year of increases,” led by rising interest rates, prices of everyday goods and construction materials, tenant improvement costs, wait times for materials and higher vacancy rates among commodity office buildings in suburban areas. Combined with the enduring work-from-home dynamic and other emerging trends impacting businesses, now is the ideal time for owners and investors of commercial office assets to strongly consider new disposition or reposition strategies, says Owen Rouse, Vice President of MacKenzie Commercial Real Estate Services, LLC.
“Owners and investors of commercial office buildings, especially smaller and older assets situated in suburban markets, are advised to closely monitor current economic and real estate trends that could conspire to negatively impact values,” explained Rouse. “Although many workers have returned to the traditional workplace environment, a significant percentage are expected to maintain a remote presence which has caused companies to rethink and, in many instances, downsize its footprint. Assets especially at risk for decreased valuation include those with smaller floor plates, aging HVAC systems and those with principals getting close to retirement age.”
Rouse further suggests that it is essential for owners and investors to be “keenly aware of what is transpiring in their specific submarket by consuming timely market intelligence that can provide guidance in their decision-making.” He adds that “holding an asset too long in an illiquid or declining market can force owners to become extended checkwriters due to rising expenses and vacancies.” Rouse says that “investors cycle into and out off positions for specific reasons and assets can become increasingly difficult or easy to manage as they age.”
“There are multiple ways to successfully navigate through the decision-making process, but the key to remember is that each situation is completely unique and that a thorough analysis of the asset and specific market is the necessary first step,” Rouse explains. “The promising news is that opportunities do exist but owners need to be proactive rather than reactive, and that starts with establishing a relationship with a third-party partner that can provide unbiased analysis, viewpoints and a workable roadmap to a successful outcome based on real-time information and intelligence.”
Rouse says that possible solutions include establishing a new marketing and leasing strategy that can elevate occupancy withing the building, selling the asset or initiating an aggressive repositioning or redevelopment plan that can untap long-term potential. By way of example, he points to the efforts of a commercial real estate development company that, after acquiring a small commercial office portfolio, revealed plans to convert a portion of the space to a flex/R&D confirmation to take advantage of existing market conditions. Entirely repurposing the land is another option.
Other factors to consider in the evaluation and decision-making process include the availability and cost of capital needed to perform project upgrades, market-specific zoning regulations and political temperament.
“I cannot enough stress the importance of generating an outside perspective to implement an anticipatory-style approach that sees the around the corner and is not influenced by internal biases that could cloud judgement,” Rouse said. “Markets form and reform as catalytic events or events take the stage and a seasoned real estate professional can spot trends and identify which companies are entering or exiting a particular submarket.”
MacKenzie Commercial Real Estate Services is the real estate brokerage arm of The MacKenzie Companies, which operates six full-service divisions addressing all real estate asset classes including MacKenzie Management Company, LLC, MacKenzie Contracting Company, LLC, MacKenzie Capital, LLC, MacKenzie Investment Group, LLC and MacKenzie Multifamily Management, LLC. The company provides customized real estate solutions for institutional owners, investors, private companies and individuals. For additional information, visit www.mackenziecommercial.com
